Business context and reporting period
Destination XL Group, Inc. is a specialty retailer of big-and-tall men’s clothing, operating stores, e-commerce and a developing wholesale business. The filing is a Form 10-Q for the quarter ended August 3, 2019 (fiscal 2019 second quarter), with six-month results compared with the periods ended August 4, 2018. The request metadata labels the period “2018 Q2,” which does not match the filing’s reporting period.
At quarter-end, the company operated 328 stores. Its fiscal year ends February 1, 2020.
Financial results and liquidity
Amounts below are in millions of dollars unless stated otherwise.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Sales | $123.2 | $122.2 | $236.2 | $235.5 |
| Gross profit | $54.6 | $56.5 | $104.0 | $107.2 |
| Gross margin, including occupancy | 44.3% | 46.3% | 44.0% | 45.5% |
| Operating income (loss) | $0.9 | $(0.2) | $(1.4) | $(2.4) |
| Net income (loss) | $0.038 | $(1.185) | $(3.0) | $(4.3) |
| Adjusted EBITDA (non-GAAP) | $7.1 | $8.7 | $11.9 | $14.0 |
- Q2 sales rose 0.9%; comparable sales were flat. First-half sales rose 0.3%, while comparable sales declined 0.5%.
- Q2 basic and diluted earnings per share were $0.00, versus a loss of $0.02 a year earlier. First-half loss per share was $0.06 versus $0.09.
- Direct sales were 21.3% of first-half retail sales, up from 20.5%. Wholesale sales were $2.7 million in Q2 and $5.1 million for the first half, compared with $0.02 million and $0.04 million, respectively, in the prior-year periods.
- Operating cash flow was $0.9 million for the first half, down from $6.8 million. Capital expenditures were $7.6 million; company-defined free cash flow was negative $6.7 million versus negative $0.6 million.
- Cash was $5.5 million. Net debt was $64.2 million, comprising $49.5 million of net revolver borrowings and $14.8 million of net FILO debt. Revolver excess availability was $44.5 million. The credit facility matures May 24, 2023.
- Current assets were $132.7 million and current liabilities $145.3 million. Inventory was $110.4 million, up about $7.5 million year over year.
Material changes versus prior comparable periods
- Sales were broadly stable, but gross margin declined 200 basis points in Q2 and 150 basis points in the first half. Management attributed the pressure mainly to increased promotions and lower-margin wholesale sales; lower occupancy costs partly offset it.
- Q2 returned to slight GAAP profitability from a prior-year loss, but adjusted EBITDA fell to $7.1 million from $8.7 million. First-half net loss narrowed, while adjusted EBITDA declined to $11.9 million from $14.0 million.
- First-half operating cash flow decreased $5.9 million. Management cited lower adjusted EBITDA, working-capital timing, higher incentive payments, and inventory investment.
- Adoption of ASC 842 lease accounting on February 3, 2019 added substantial right-of-use assets and lease liabilities. At August 3, lease assets were $200.5 million and operating lease liabilities totaled $238.8 million. Prior-year balance-sheet comparisons were not restated.
- Store count declined to 328 from 339 a year earlier, alongside rebranding, closures and planned exits from Rochester stores.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2019 comparable-sales growth in its omni-channel retail business and positive free cash flow, but provided no numerical targets. It said existing operating cash generation and credit-facility availability were expected to meet foreseeable liquidity needs.
- Management called Q2 sales disappointing and below expectations. Delayed warm weather weighed on seasonal merchandise early in the quarter; sales improved as weather warmed. Promotions intended to drive traffic and manage inventory reduced merchandise margins.
- Inventory growth reflected accelerated receipts from China ahead of potential tariffs, stock for third-quarter wholesale deliveries, replacement goods after a cargo-vessel fire, and expanded product presentation. Clearance inventory was 10.9% of inventory versus 10.1% a year earlier.
- The company planned two new DXL stores, rebranding of Casual Male XL locations, and further store closures, including its remaining Rochester Clothing stores. It also cited investment in customer relationship systems, data infrastructure and analytics.
- ASC 842 adoption produced a $5.3 million credit to opening accumulated deficit and ended future amortization of a deferred sale-leaseback gain, previously benefiting results by about $1.5 million annually.
- The company maintained a full valuation allowance against deferred tax assets: $47.9 million against $58.3 million of deferred tax assets. It reported $141.5 million of federal net operating loss carryforwards subject to expiration and another $20.8 million not subject to expiration.
- Debt is secured by substantially all company assets and carries variable interest rates. Management estimated that a 50-basis-point rate increase would add about $357,000 to annualized interest expense. The company reported no material change to previously disclosed risk factors; ordinary-course legal matters were not expected by management to materially affect results or financial position.
Important facts for investors to verify
- Confirm the intended period: the supplied filing is for fiscal 2019 Q2, not 2018 Q2.
- Track comparable sales, merchandise margins, promotional intensity and wholesale profitability as wholesale volume expands.
- Assess whether inventory growth converts to sales without increased markdowns, particularly given tariff-related purchasing and clearance inventory.
- Monitor operating cash flow, capital spending, free cash flow, revolver availability, borrowing costs and compliance with credit-facility covenants.
- Evaluate progress against the company’s non-numeric full-year comparable-sales and free-cash-flow outlook, including planned store openings, rebrands and closures.
- Review the effects of lease obligations and the valuation allowance on reported balance-sheet strength and future earnings.